Biogen, one of the world’s first global biotechnology companies, owns a patent to develop an Alzheimer’s disease treatment. It is considering building a new medicine production facility in Raleigh, NC to produce active pharmaceutical ingredients for Alzheimer medicine. It is estimated that the new medicine production facility would cost $300 million to build. The new facility will produce the treatment with a 3-month course of treatment priced at $10,000. The cost to produce the medicine per treatment is $3000. The company expects that 10,000 patients per year forever will use the treatment. For convenience of discussion, assume the cost to build the new medicine production facility will stay the same as well as the number of patients to get the treatments every year will stay the same forever.

However, there is fierce competition in the Alzheimer drug market. The competition causes an uncertain drug price next year. Suppose a 3-month course of treatment will be either $20,000 per treatment or $4,000 per treatment next year with equal probability. The risk-free rate is 10% per year and that is also the cost of capital (Ignore taxes)

a. What is the NPV to invest today? __________
b. Calculate the expected NPV of the project if postponed by one year? ____________
c. Calculate the value of the option to postpone the building of the new facility by one year.

Answer rating: 100% (QA)

a To calculate the NPV of investing today we need to find the present value of the expected cash flows generated by the project over its lifetime The ... View the full answer